Appeals court hears arguments in SEC's case against Citigroup

NEW YORK Feb 8 (Reuters) - A federal appeals court signaled
that a U.S. securities regulator's proposed $285 million civil
fraud settlement with Citigroup Inc might end up back in
the hands of the same judge who rejected it more than a year
ago.

The settlement was intended to resolve U.S. Securities and
Exchange Commission charges that Citigroup misled investors by
selling a $1 billion collateralized debt obligation in 2007 as
housing prices were falling, without revealing its bet against
the underlying mortgages.

In rejecting the settlement in November 2011, U.S. District
Judge Jed Rakoff in Manhattan challenged the long-standing
practice of the SEC and other regulators of letting companies
settle cases without acknowledging wrongdoing. He said he had no
way to know if the accord was in the public interest.

At a hearing on Friday, a three-judge panel of the 2nd U.S.
Circuit Court of Appeals weighed how to balance the deference
given to the SEC to handle its own cases against the desire that
judges have enough facts to decide if settlements are fair.

Two of the judges suggested that Rakoff reconsider the
settlement, noting that he had presided over the trial and
eventual acquittal of former Citigroup manager Brian Stoker, the
only individual charged over the Class V Funding III CDO.

"We can remand to have him consider additional proof of
evidence from the trial," Circuit Judge Raymond Lohier said.

DEFERENCE AT ISSUE

In rejecting the settlement, Rakoff chastised both the SEC
and Citigroup for essentially hiding the facts.

"An application of judicial power that does not rest on
facts is worse than mindless, it is inherently dangerous,"
Rakoff wrote.

Because the SEC and Citigroup want the settlement approved,
the 2nd Circuit took the rare step of appointing a lawyer to
argue for Rakoff's position.

That lawyer, John "Rusty" Wing, called it a "clear
misrepresentation and misreading" of Rakoff's decision to say
that the judge required Citigroup to admit liability.

But he said there was no reason Rakoff could not ask for
more evidence before approving a settlement.

"Although the SEC deserves deference, like the rest of us,
it's not always right," Wing said.

Brad Karp, a lawyer for Citigroup, argued that more than 20
federal agencies do not always require settling defendants to
admit liability.

He said imposing such a requirement would cause federal
enforcement "to screech to a grinding halt."

In agreeing in March 2012 to hear the appeal, the 2nd
Circuit put Rakoff's ruling on hold, saying the SEC and
Citigroup had a "strong likelihood of success."

Circuit Judge Rosemary Pooler, one of the judges who issued
that stay, said it was a "red herring" as to whether Rakoff
could require an admission of wrongdoing by Citigroup.

Rakoff had noted that SEC had not for 10 years sought to
enforce injunctions to prevent further backsliding, including
against companies such as Citigroup that had faced prior
enforcement actions.

But SEC lawyer Michael Conley told the court that such
injunctions are still useful. "We do believe injunctions prove a
good prophylactic remedy," he said.

Prior to rejecting the Citigroup settlement, Rakoff had also
turned down the SEC's $33 million settlement with Bank of
America Corp to resolve charges over the Merrill Lynch &
Co takeover. He later approved a $150 million accord.